Bangalore cut taxes and red tape to boost high-tech entrepreneurs

Every Detroit leader over the past few decades has promised to transform Detroit into a “world-class city” – and left without reducing even the population of weed gardens on the city’s many vacant lots. During the same time, 10,000 miles away in India, a sleepy little town called Bangalore has turned itself into a major information technology and outsourcing hub of the world. Does Bangalore hold any lessons for Detroit? Plenty, as it turns out.

Factors thwarting Detroit

The factors that are thwarting Detroit’s renaissance are precisely the ones that made India the world’s economic basket case for about half of a century: excessive bureaucracy and destructive taxes.

When India gained its independence in 1947, the country’s socialist rulers embraced a command-and-control approach to the economy in the name of ensuring a “rational allocation of resources.” They nationalized many important industries including heavy manufacturing, airlines and telecommunications. Worse, they tied up private industries in reams of bureaucratic red tape.

Not surprisingly, instead of catapulting India’s economic growth to First World levels as its planners had promised, these bureaucratic roadblocks prevented India from even keeping pace with its smaller Asian neighbors such as South Korea and Hong Kong.

But all this began to change in the 1990s when India embarked on its massive liberalization effort. In a special bid to nurture the nascent information technology industry, the central government in New Delhi launched something called the Software Technology Parks Initiative. States that signed up for this program could not only offer information technology companies exemption from federal taxes, but also single-window clearance for all federal statutory approvals through a special liaison office. Karnataka, the state where Bangalore is located, was among the first to join this program, something that allowed it to attract many large home-grown and foreign IT companies.

But instead of limiting technology parks certification to companies located on special campuses as other Indian states did, Karnataka extended it to any company anywhere in Bangalore. This meant that any geek with a computer and e-mail could write and deliver software to anyone in the world from his or her own home.

One-stop permitting

By contrast, Detroit’s leaders have only talked about creating a one-stop shop akin to the software parks’ single-window clearance. Kwame Kilpatrick is so preoccupied with attracting big, glamorous Aswan Dam-type projects (witness the millions in tax credits he has arranged to pour toward the revival of a single building, the Book-Cadillac hotel) that he has no time to think about mundane process improvements such as these.

As if that was not enough to stymie entrepreneurship, the city imposes a plethora of licensing and fee requirements on 265 occupations – 60 more than the state – from street vendors to day care centers. A home-based business has to acquire 70 or so building or equipment permits just to get started.

But if Bangalore is ahead of Detroit in loosening the yoke of bureaucracy, it is also ahead in simplifying and lowering the tax burden on businesses. Detroit and Michigan, on the other hand, have done little to lower the overall tax burden on businesses – although they have given selective tax breaks to attract favored businesses such as Compuware. Michigan, in fact, is just one of a handful of states in the nation that levy all three: a sales tax, a personal income tax and the business-busting Single Business Tax – though that tax will dropped for another form of business tax next year.

Detroit’s tax burden

On top of all these, Detroit has added a 5 percent tax on residents’ utility bills, a 2.5 percent personal income tax on residents, a 1.25 percent personal income tax on people who work in the city and a 1 percent corporate income tax. Conventional wisdom holds that companies are flocking to Bangalore because of its cheap high-tech labor. But without a radical restructuring of the national and state economies, this boom would have never happened.

Michigan and Detroit, too, have much to offer potential businesses: cheap real estate easily accessible by a decent freeway system, a lovely riverfront, proximity to a fairly wealthy country. If they want to flourish again they will have to get serious about creating a policy climate that allows business, big and small, to discover these and other assets.

Shikha Dalmia is a policy analyst and Reason Foundation and lives in Metro Detroit. An archive of her work is here and Reason’s government reform research and commentary is here.